Why non-compliance could prove to be a costly mistake for Indian banks

Indian banks, once admired for their sound and safe conduct, are now increasingly getting caught breaking the rules. This week, the Reserve Bank of India (RBI), has slapped a hefty fine of Rs 58.9 crore on the country's second large private bank, ICICI Bank Ltd, for the failure to follow the maturity guidelines for securities portfolio. Imagine a new bank, Airtel Payments Bank, just starting its operations, has been caught for violating the Know Your Customer (KYC) guidelines, which is the most basic requirement in the banking industry.

In less than a year, the private banks, which are perceived to be well-managed, have often received the wrath of the banking regulator. Some of the banks fined, recently, were IDFC Bank, Yes Bank and IndusInd Bank.

Why are banks falling by the wayside on the most critical compliance issues? The compliance is one issue, which creates confidence amongst depositors, investors and also the government. Banks are like public and privileged institutions that are allowed to accept public deposits. And there are reputational risk issues. So is there a lack of focus as most resources are chasing growth or just a casual attitude towards compliance?  

"It could probably be with the knowledge of the top management," speculates a retired banker.

But the issue is very serious. There has to be some deterrent that forces banks to deploy more bodies for compliance.

Many say the responsibility lies in the top management and the board. In fact, the board should take these compliance violation issues seriously. It actually cost Shashi Arora, CEO of Airtel Payments Bank, his job when the KYC norms violation came out in the open.

The amount of fine imposed by RBI in the past shows that it won't tolerate compliance violations. In fact, the focus on compliance has accelerated, globally, after the global financial meltdown. There are risks that are known and there are risks that are unknown. Regulators don't want another 2008-like crisis in the banking industry.

According to an estimate, the banking regulators in US and Europe have levied a cumulative fines of over $340 billion, since, the global financial meltdown for various violations of banking guidelines. However, what is alarming is the estimate about these fines, which can go up to $400 billion by 2020.

Back home, Indian banks have their own share of non-compliance. In the last decade, banks have been found to be violating guidelines relating to KYC, anti-money laundering, selling complex derivatives product etc. The risks for banks are only increasing day by day with technology and digitization. While banks are moving at a fast pace in terms of innovation and also tying up with third-party vendors, the regulators are watching their every step for any slip-up. Clearly, the cost of non-compliance would be heavy.